Debt

  While already by the sixteenth century, merchants were using bills of exchange to settle debts, government debt bonds—rentes, juros, annuities—were the real credit money of the new age. It’s here that we have to look for the real origins of the “price revolution” that hammered once-independent townsfolk and villagers into the ground and opened the way for most of them to ultimately be reduced to wage laborers, working for those who had access to these higher forms of credit. Even in Seville, where the treasure fleets from the New World first touched port in the Old, bullion was not much used in day-to-day transactions. Most of it was taken directly to the warehouses of Genoese bankers operating from the port and stored for shipment east. But in the process, it became the basis for complex credit schemes whereby the value of the bullion was loaned to the emperor to fund military operations, in exchange for papers entitling the bearer to interest-bearing annuities from the government—papers that could in turn be traded as if they were money. By such means, bankers could almost endlessly multiply the actual value of gold and silver they held. Already in the 1570s, we hear of fairs in places like Medina del Campo, not far from Seville, that had become “veritable factories of certificates,” with transactions carried out exclusively through paper.79 Since whether the Spanish government would actually pay their debts, or how regularly, were always slightly uncertain, the bills would tend to circulate at a discount—especially as juros began circulating throughout the rest of Europe—causing continual inflation.80

  It was only with the creation of the Bank of England in 1694 that one can speak of genuine paper money, since its banknotes were in no sense bonds. They were rooted, like all the others, in the king’s war debts. This can’t be emphasized enough. The fact that money was no longer a debt owed to the king, but a debt owed by the king, made it very different than what it had been before. In many ways it had become a mirror image of older forms of money.

  The reader will recall that the Bank of England was created when a consortium of forty London and Edinburgh merchants—mostly already creditors to the crown—offered King William III a £1.2 million loan to help finance his war against France. In doing so, they also convinced him to allow them in return to form a corporation with a monopoly on the issuance of banknotes—which were, in effect, promissory notes for the money the king now owed them. This was the first independent national central bank, and it became the clearinghouse for debts owed between smaller banks; the notes soon developed into the first European national paper currency. Yet the great public debate of the time, a debate about the very nature of money, was about not paper but metal. The 1690s were a time of crisis for British coinage. The value of silver had risen so high that new British coins (the mint had recently developed the “milled edge” familiar from coins nowadays, which made them clip-proof) were actually worth less than their silver content, with predictable results. Proper silver coins vanished; all that remained in circulation were the old clipped ones, and these were becoming increasingly scarce. Something had to be done. A war of pamphlets ensued, which came to a head in 1695, one year after the founding of the bank. Charles Davenant’s essay on credit, which I’ve already cited, was actually part of this particular pamphlet-war: he proposed that Britain move to a pure credit money based on public trust, and he was ignored. The Treasury proposed to call in the coinage and reissue it at a 20- to 25-percent lower weight, so as to bring it back below the market price for silver. Many who supported this position took explicitly Chartalist positions, insisting that silver has no intrinsic value anyway, and that money is simply a measure established by the state.81 The man who won the argument, however, was John Locke, the Liberal philosopher, at that time acting as advisor to Sir Isaac Newton, then Warden of the Mint. Locke insisted that one can no more make a small piece of silver worth more by relabeling it a “shilling” than one can make a short man taller by declaring there are now fifteen inches in a foot. Gold and silver had a value recognized by everyone on earth; the government stamp simply attested to the weight and purity of a coin, and—as he added in words veritably shivering with indignation—for governments to tamper with this for their own advantage was just as criminal as the coin-clippers themselves:

  The use and end of the public stamp is only to be a guard and voucher of the quality of silver which men contract for; and the injury done to the public faith, in this point, is that which in clipping and false coining heightens the robbery into treason.82

  Therefore, he argued, the only recourse was to recall the currency and restrike it at exactly the same value that it had before.

  This was done, and the results were disastrous. In the years immediately following, there was almost no coinage in circulation; prices and wages collapsed; there was hunger and unrest. Only the wealthy were insulated, since they were able to take advantage of the new credit money, trading back and forth portions of the king’s debt in the form of banknotes. The value of these notes, too, fluctuated a bit at first, but eventually stabilized once they were made redeemable in precious metals. For the rest, the situation only really improved once paper money, and, eventually, smaller-denomination currency, became more widely available. The reforms proceeded top-down, and very slowly, but they did proceed, and they gradually came to create the world where even ordinary, everyday transactions with butchers and bakers were carried out in polite, impersonal terms, with small change, and therefore it became possible to imagine everyday life itself as a matter of self-interested calculation.

  It’s easy enough to see why Locke would adopt the position that he did. He was a scientific materialist. For him, “faith” in government—as in the quote above—was not the citizens’ belief that the government will keep its promises, but simply that it won’t lie to them; that it would, like a good scientist, give them accurate information, and who wanted to see human behavior as founded in natural laws that—like the laws of physics that Newton had so recently described—were higher than those of any mere government. The real question is why the British government agreed with him and resolutely stuck to this position despite all the immediate disasters. Soon afterward, in fact, Britain adopted the gold standard (in 1717) and the British Empire maintained it, and with it the notion that gold and silver were money, down to its final days.

  True, Locke’s materialism also came to be broadly accepted—even to be the watchword of the age.83 Mainly, though, the reliance on gold and silver seemed to provide the only check on the dangers involved with the new forms of credit-money, which multiplied very quickly—especially once ordinary banks were allowed to create money too. It soon became apparent that financial speculation, unmoored from any legal or community constraints, was capable of producing results that seemed to verge on insanity. The Dutch Republic, which pioneered the development of stock markets, had already experienced this in the tulip mania of 1637—the first of a series of speculative “bubbles,” as they came to be known, in which future prices would first be bid through the ceiling by investors and then collapse. A whole series of such bubbles hit the London markets in the 1690s, in almost every case built around a new joint-stock corporation formed, in imitation of the East India Company, around some prospective colonial venture. The famous South Sea Bubble in 1720—in which a newly formed trading company, granted a monopoly of trade with the Spanish colonies, bought up a considerable portion of the British national debt and saw its shares briefly skyrocket before collapsing in ignominy—was only the culmination. Its collapse was followed the next year by the collapse of John Law’s famous Banque Royale in France, another central-bank experiment—similar to the Bank of England—that grew so quickly that within a few years it had absorbed all the French colonial trading companies, and most of the French crown’s own debt, issuing its own paper money, before crashing into nothingness in 1721, sending its chief executive fleeing for his life. In each case, this was followed by legislation: in Britain, to forbid the creation of new joint-stock companies (other than for the building of turnpikes and canals), and in Fr
ance, to eliminate paper money based in government debt entirely.

  It’s unsurprising, then, that Newtonian economics (if we may call it that)—the assumption that one cannot simply create money, or even, really, tinker with it—came to be accepted by almost everyone. There had to be some solid, material foundation to all this, or the entire system would go insane. True, economists were to spend centuries arguing about what that foundation might be (was it really gold, or was it land, human labor, the utility or desirability of commodities in general?) but almost no one returned to anything like the Aristotelian view.

  Another way to look at this might be to say that the new age came to be increasingly uncomfortable with the political nature of money. Politics, after all, is the art of persuasion; the political is that dimension of social life in which things really do become true if enough people believe them. The problem is that in order to play the game effectively, one can never acknowledge this: it may be true that, if I could convince everyone in the world that I was the King of France, I would in fact become the King of France; but it would never work if I were to admit that this was the only basis of my claim. In this sense, politics is very similar to magic—one reason both politics and magic tend, just about everywhere, to be surrounded by a certain halo of fraud. These suspicions were widely vaunted at the time. In 1711, the satirical essayist Joseph Addison penned a little fantasy about the Bank of England’s—and as a result, the British monetary system’s—dependence on public faith in the political stability of the throne. (The Act of Settlement of 1701 was the bill that guaranteed the royal succession, and a sponge was a popular symbol for default). In a dream, he said,

  I saw Public Credit, set on her throne in the Grocer’s Hall, the Great Charter over her head, the Act of Settlement full in her view. Her touch turned everything to gold. Behind her seat, bags filled with coin were piled up to the ceiling. On her right the door flies open. The Pretender rushes in, a sponge in one hand, and in the other a sword, which he shakes at the Act of Settlement. The beautiful Queen sinks down fainting. The spell by which she has turned all things around her into treasure is broken. The money bags shrink like pricked bladders. The piles of gold pieces are turned into bundles of rags or faggots of wooden tallies.84

  If one does not believe in the king, then the money vanishes with him.

  Thus kings, magicians, markets, and alchemists all fused in the public imagination during this era, and we still talk about the “alchemy” of the market, or “financial magicians.” In Goethe’s Faust (1808), he actually has his hero—in his capacity as alchemist-magician—pay a visit to the Holy Roman Emperor. The Emperor is sinking under the weight of endless debts that he has piled up paying for the extravagant pleasures of his court. Faust, and his assistant, Mephistopheles, convince him that he can pay off his creditors by creating paper money. It’s represented as an act of pure prestidigitation. “You have plenty of gold lying somewhere underneath your lands,” notes Faust. “Just issue notes promising your creditors you’ll give it to them later. Since no one knows how much gold there really is, there’s no limit to how much you can promise.”85

  This kind of magical language almost never appears in the Middle Ages.86 It would appear that it’s only in a resolutely materialist age that this ability to simply produce things by saying that they are there comes to be seen as a scandalous, even diabolical. And the surest sign that one has entered such a materialist age is precisely the fact that it is seen so. We have already observed Rabelais, at the very beginning of the age, reverting to language almost identical to that used by Plutarch when he railed against moneylenders in Roman times—“laughing at those natural philosophers who hold that nothing can be made of nothing,” as they manipulate their books and ledgers to demand back money they never actually had. Panurge just turned it around: no, it’s by borrowing that I make something out of nothing, and become a kind of god.

  But consider the following lines, often attributed to Lord Josiah Charles Stamp, director of the Bank of England:

  The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the earth; take it away from them, but leave them with the power to create credit, and with the stroke of a pen they will create enough money to buy it back again … If you wish to remain slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits.87

  It seems extremely unlikely that Lord Stamp ever really said this, but the passage has been cited endlessly—in fact, it’s probably the single most often-quoted passage by critics of the modern banking system. However apocryphal, it clearly strikes a chord, and apparently for the same reason: bankers are creating something out of nothing. They are not only frauds and magicians. They are evil, because they’re playing God.

  But there’s a deeper scandal than mere prestidigitation. If Medieval moralists did not raise such objections, it was not just because they were comfortable with metaphysical entities. They had a much more fundamental problem with the market: greed. Market motives were held to be inherently corrupt. The moment that greed was validated, and unlimited profit was considered a perfectly viable end in itself, this political, magical element became a genuine problem, because it meant that even those actors—the brokers, stock-jobbers, traders—who effectively made the system run had no convincing loyalty to anything, even to the system itself.

  Hobbes, who first developed this vision of human nature into an explicit theory of society, was well aware of this greed dilemma. It formed the basis of his political philosophy. Even, he argued, if we are all rational enough to understand that it’s in our long-term interest to live in peace and security, our short-term interests are often such that killing and plundering are the most obviously profitable courses to take, and all it takes is a few to cast aside their scruples to create utter insecurity and chaos. This was why he felt that markets could only exist under the aegis of an absolutist state, which would force us to keep our promises and respect one another’s property. But what happens when we’re talking about a market in which it is state debts and state obligations themselves that are being traded; when one cannot really speak of a state monopoly on force because one is operating in an international market where the primary currency is bonds that the state depends on for its very ability to marshal military force?

  Having made incessant war on all remaining forms of the communism of the poor, even to the point of criminalizing credit, the masters of the new market system discovered that they had no obvious justification left to maintain even the communism of the rich—that level of cooperation and solidarity required to keep the economic system running. True, for all its endless strains and periodic breakdowns, the system has held out so far. But as recent events have dramatically testified, it has never been resolved.

  Part IV:

  So What Is Capitalism, Anyway?

  We are used to seeing modern capitalism (along with modern traditions of democratic government) as emerging only later: with the Age of Revolutions—the industrial revolution, the American and French revolutions—a series of profound breaks at the end of the eighteenth century that only became fully institutionalized after the end of the Napoleonic Wars. Here we come face to face with a peculiar paradox. It would seem that almost all elements of financial apparatus that we’ve come to associate with capitalism—central banks, bond markets, short-selling, brokerage houses, speculative bubbles, securization, annuities—came into being not only before the science of economics (which is perhaps not too surprising), but also before the rise of factories, and wage labor itself.88 This is a genuine challenge to familiar ways of thinking. We like to think of the factories and workshops as the “real economy,” and the rest as superstructure, constructed on top of it. But if this were really so, then how can it be that the superstructure came first? Can the dreams of the system create its body?

  All this rais
es the question of what “capitalism” is to begin with, a question on which there is no consensus at all. The word was originally invented by socialists, who saw capitalism as that system whereby those who own capital command the labor of those who do not. Proponents, in contrast, tend to see capitalism as the freedom of the marketplace, which allows those with potentially marketable visions to pull resources together to bring those visions into being. Just about everyone agrees, however, that capitalism is a system that demands constant, endless growth. Enterprises have to grow in order to remain viable. The same is true of nations. Just as five percent per annum was widely accepted, at the dawn of capitalism, as the legitimate commercial rate of interest—that is, the amount that any investor could normally expect her money to be growing by the principle of interesse—so is five percent now the annual rate at which any nation’s GDP really ought to grow. What was once an impersonal mechanism that compelled people to look at everything around them as a potential source of profit has come to be considered the only objective measure of the health of the human community itself.